Research report on US drugstore chains: CVS Caremark, Walgreens, RiteAid

1. Analysis of US Drug store chains
Knowledge Foundry Business Solutions
May 2009
Authors: Raj Bhatt (raj@knowledgefoundry.net), Vivek Bothra
This document is not intended to provide tax, legal, insurance or investment advice, and nothing in it should be construed as
an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Knowledge Foundry Business
Solutions.

2. Contents
• Comparison of metrics
• Company-specific details

3. Drug retailing is a mature and competitive
business
Source: NACDS, Credit Suisse

4. Store chains and mail order have been gaining
strength over independent stores in dispensing
prescriptions
Market Share of Prescription Rx Sales
100%
80%
60%
40%
20%
0%
2001 2002 2003 2004 2005 2006 2007 2008
Chains Independents
Food Stores Mass Merchandisers
Mail Order
Source : NACDS, Credit Suisse

5. Drugstore chains are perceived to be convenient
and trustworthy for dispensing prescriptions

6. CVS, Rite Aid and Walgreen are the major US
chain drug store chains
Comparison of the major drugstore chains (2008)
Sales ($Mn) Stores*
100000 8000 7483
87472 6,934
80000
6000
59,034 4901
60000
4000
40000
26,289
2000
20000
0 0
Cvs Corp. Rite Aid Walgreen Cvs Corp. Rite Aid Walgreen
Employees
250,000 237,000
215,000
200,000
150,000
113,000
100,000
50,000
0
Cvs Corp. Rite Aid Walgreen
* Wal-Mart has 4100 pharmacies, Kroger has 1972; Target has 1400; Kmart has 1000; Supervalu has 920 pharmacies whereas
Winn-Dixie has 400
Source: Annual Reports, Yahoo Finance, Wikipedia.org

7. Prescription drugs usually account for more than
65% of drugstore chain sales
Rite Aid Sales break up 2008(%)
0.4%
33.1%
66.5%
Pharmacy Front end Other
Walgreens Sales Break Up 2008 (%)
25%
10%
65%
Prescription Drugs Non prescription drugs General Merchandise

8. CVS is the largest US provider of prescriptions
# Rx's dispensed in 2008 (MM)
800
729
700
617
600
500
400
316 300
300 246
200 149
100
0
CVS Walgreens Medco RiteAid Walmart Express/
NextRx

9. CVS leads in the West and the South-East,
Walgreens in strong in the Mid-West and South-
East, whereas RiteAid leads in the North-East
Regional Market Share % (2008)
35 34
31
30 28
26
25 24 23
21
20 19
% 18 18
15
15 13
10
5
0
NorthEast West Coast SouthEast MidWest
CVS RiteAid Walgreens
Source: Credit Suisse

10. While CVS and Rite-Aid have acquired stores,
Walgreens has primarily opened new stores
Drug Stores Acquired New Store openings
2000 700
1,862 608
1800
600
1600 501
475
1400
500
1200 400
1000
701 300
800
529 188
600 423 200 147 140
400
120 100 40 47 33
200 95
2 0 9
0 0
2006 2007 2008 2006 CVS 2007
Walgreen Rite Aid 2008
CVS Walgreen Rit e Aid
Stores Closed
Stores Relocated*
250
200 160
183 136 130
200 140 118
120
150
117 100
94 85 94 80 66 65
100 56
60
47 43
50 32 40
20
0 0
2006 2007 2008 2006 2007 2008
CVS Walgreen Rite Aid CVS Rite Aid
* Data for Walgreens is not available
Sources: 10k filling, annual reports, press releases

11. Comparing organic growth, Rite-Aid has grown
the slowest in the past few years
Same-store Prescription sales growth
Same-store Front-end sales growth
10%
8%
8%
6%
6% CVS
CVS
Rite-Aid 4% Rite-Aid
4% Walgreens Walgreens
2% 2%
0% 0%
2006 2007 2008 2006 2007 2008
Years Years
Same-store Sales growth
10%
8%
6% CVS
Rite-Aid
4% Walgreens
2%
0%
2006 2007 2008
Years
Source: Annual reports, Investor Presentations

12. CVS has the best operating ratios -- but higher
assets due to recent acquisitions
20% 15%
10%
10%
Operating profit/Assets 0%
CVS Rite Aid Walgeen
CVS’ high inventory -10%
turnover may be due -20%
-30% -25%
to the Caremark PBM
business
Rite-Aid has negative
operating margins
driven by low sales/
sq ft and low
Inventory Days of Sales Inventory/ Total Assets Operating Margin % productivity
100 60% 10%
80 6.9%
80 42% 5.8%
66
40% 32% 5%
60
48
40
20% 15% 0%
20 Cvs Corp. Rite Aid Walgreen
0% -5%
0
Cvs Corp. Rite Aid Walgreen CVS Rite Aid Walgeen
-10% -8.0%
Sales/Sq feet Contribution Margin % Sales/ Employee
CVS has lower
30 27 28 500
contribution margin 1000
900 843
843 813
813
400
407
800 21
but higher sales per 600
600
20
300
233 249
sq ft and sales per 400
388
429
10
200
300
employee 200
100
0 0 Cvs Corp. Rite Aid Walgreen
0
CVS Rite Aid Walgeen
Cvs Corp.
Cvs Corp. Rite Aid
Rite Aid Walgreen
Walgreen

13. CVS has had a consistently higher operating margin–
Rite-Aid had negative margins in 2008
Operating Margin
10%
5%
Percentage Cvs Corp.
0% Rite Aid
2006 2007 2008 Walgreen
-5%
-10%
Years
Operating Margin
10%
5%
0%
Percentage
-5% Q1 Q2 Q3 Q4 Cvs Corp.
-10% Rite Aid
-15% Walgreen
-20%
-25%
-30%
2008

14. CVS carries less than 45 days of inventory
whereas RAD and WAG carry more than 60 days
Inventory (Days of Sales)
100
75
Cvs Corp. CVs turnover may be
driven by the PBM
50 Rite Aid
business
Walgreen
25
0
2006 2007 2008
Years
Inventory (Days of Sales)
100
Although CVS has
75 faster inventory
turnover, the
Cvs Corp. competition is
50 catching up
Rite Aid
Walgreen
25
0
Q1 Q2 Q3 Q4
2008

15. CVS has had consistently higher employee
productivity than Rite-Aid and Walgreen
Sales/Employee
600000
500000
400000 Cvs Corp.
Dollars
300000 Rite Aid
200000 Walgreen
100000
0
2006 2007 2008
Years
Sales/Employee
120000
100000
80000 Cvs Corp.
Dollars
60000 Rite Aid
40000 Walgreen
20000
0
Q1 Q2 Q3 Q4
2008

16. Rite-Aid has much lower sales per square foot
than its rivals
Sales/Square foot
900
800
700
600 Cvs Corp.
dollars
500 Rite Aid
400 Walgreens
300
200
100
0
These numbers are 2006 2007 2008
for the retail segment
years
Pls. note that the 2008 CVS number does not include Longs’ Drug store which have a much lower
average of $598 per sq. ft

17. … and smaller, right-staffed stores
Avg Store Sq Foot
15000 13866
12500
10472
10000
5000
0
CVS Rite aid Walgreens
Em ployee/Store
40 34
29
30 23
20
10
0
CVS Rite aid Walgreens

18. Company-specific details

19. CVS Caremark is positioning itself as an
integrated healthcare company

20. CVS covers most states except the North-West
CVS was primarily
an east coast
retailer till 2003
Minute Clinics are
staffed by nurse
practitioners and
currently focus on
acute conditions
(e.g., Flu)

21. Its store-brand sales have increased 47% over
the past four years

22. Key strategic initiatives at CVS Caremark
• Completed acquisition of Longs Drugs and Rx America – to gain strength on the West
Coast
• Successfully launched Proactive Pharmacy Care – a Pharmacy Benefits Management
program– to compete against traditional PBM programs as well as drug retailers
• Proven to improve adherence to prescriptions
• Uses plan design based on a ‘Customer Engagement Engine’ that uses customer
behavior, evidence-based medicine
• already $8.9 BN in sales
• More than 8 MM ExtraCare Health cards
• 250 Maintenance Choice enterprise customers
• Focusing on specialty pharmacy -- 30 conditions including hemophilia, MS, RA
• 20 mail order pharmacies and 52 specialty retail pharmacies
• generating revenue of $ 10+ BN
• Pharmacy service initiative (PSI) and IT initiative (RxConnect ) to improve the
prescription filling process
• Launched call center to free up pharmacists time – and improve customer service

23. Walgreens has a rich history of innovation
• 1950 – self service stores
• 1968 – Child-proof containers
• 1981 – Satellite-linked stores
• 1991– POS scanners
• 1992 – Drive-through pharmacies
• 1999- online prescription history
• 2002 – multi-language prescription labels
• 2005 – online digital photo printing

24. Walgreens has a wide spread store network

25. Key strategic initiatives at Walgreens
• Slowing store growth
• Re-inventing the customer experience
• ‘Affordable Essentials’ program
• Prescription Savings program has 1.7 MM+ members –offers discounts on more
than 5000 generics; and 90-day supplies at a dollar a week
• Optimizing assortment at a store level – to sell more front-end items
• Optimizing pricing and promotions
• Rolling out new ‘Customer-Centric Retailing (CCR)’ format
• Enhance shopping experience by improving sightlines, layout and signage
• Collaborating with vendors to leverage insights e.g., Baby care layout
• Transforming community pharmacy by the POWER program (centralizing data entry,
data review and clinical review of prescriptions)
• Allows pharmacists to strengthen their role as trusted clinicians
• Reduces overall pharmacy costs
• Rolled out in all Florida stores and now launching in Arizona

26. Key strategic initiatives at Walgreens (contd.)
• Expanding health & wellness and specialty pharmacy
• 273 Take Care clinics and 364 Worksite Health Centers catering to 180+
enterprise clients and millions of consumers
• Specialty/ Infusion centers
• Rewiring for growth – driving major cost reduction and productivity gain
• Strategic sourcing of indirect spend
• Reduce corporate overhead and store labor
• Balance workload to free up pharmacists’ time

27. Rite-Aid has a strong presence
on the east coast and in select
west coast markets
Source: Rite Aid presentation

28. Key strategic initiatives at Rite-Aid
• Focused store growth program
– Growth focused on key strategic markets
– Segmented stores using sales and profitability performance (High EBITDA
margin stores; High volume, lower EBITDA margin stores; Good volume; Low
volume)
– Emphasis on relocations
– “Customer World” pharmacy centric store format prototype
• Strengthen pharmacy operations
– Improve customer service using
• ‘Ready when promised’ program
• grow ‘Automated Courtesy Refill’ program
• Use new ‘Nexgen’ KPIs
• Focus on service at under-performing stores
– Differentiated loyalty programs – senior “Living More”, Rx Savings Card
– Focus on health and wellness programs

29. Key strategic initiatives at Rite-Aid
(contd.)
• Improve front-end operations
– Continue to grow private brand penetration (currently 13% of front store)
– Differentiating with GNC within-a-store
– “Living More” senior loyalty program
– Maximize prescription switches to OTC
– Optimize front-end assortment and use new pricing model and ad zones to drive
sales
• Continue operational improvements
– Improve store productivity through implementation of best practices across
stores
– Inventory reduction initiatives without sacrificing customer satisfaction
– Expenses aligned with sales level with continued focus on SG&A reduction
initiatives
– Reduction in supply chain costs